Zambia has a lot of work to do in order start achieving inclusive double-digit GDP growth which will go a long way into helping absorb an ever increasing number of the youth population into the job market. One sector which seems to be moving in a positive direction is Copper mining - which accounts for north of 75% of exports and over 12% of GDP. LME Copper prices are up 21% over the last year, closing at $6,712/MT on Friday last week:
Goldman Sachs revised it's copper price forecast to upward of $8,000/MT in 2018. Mining giants First Quantum Minerals, Glencore, Barrick Gold and Vedanta are some of the major players poised to ride this wave through their Zambian operations. This should also see the economies of the Copperbelt and North-Western provinces experiencing strong recovery/growth after seeing significant lay-offs over the last 3 - 4 years.
Political Regime Stability
President Lungu and the Patriotic Front Government have managed to hold onto power despite two very close elections in the last 3 years. Zambian mining companies haven't operated in an environment where a President has ruled for 2 complete terms since the era of Zambia's second President (1991 - 2001). Will President Lungu be eligible to contest in 2021 (pending the ruling of the Constitutional Court) AND win 3/3 against opposition leader Hakainde Hichilema?
New Mineral Royalty Tax Regime
After years of back and forth on this matter, the Government and mining sector settled on the following effective July 1 2015:
The Zambian government has been guilty of creating uncertainty with u-turns on policy in various sectors over the last few years (much to the chagrin of the private sector), especially in the years leading up to general elections. Hence it is prudent to ask whether this policy will stand the test of time!
No More Power Balackouts?
From mid 2015 into the third quarter of 2016, Zambia, which is sources 95% of electricity from hydro-power was hit with an over 600MW power deficit primarily caused by a prolonged drought in preceding years. This saw utility company ZESCO enforcing power blackouts of up to 14 hours a day. Mining companies use just over 50% of power generated - they were not spared. The situation gradually recovered with an additional 300MW of Thermal Power coming online in 2016 and normal rainfall patterns resuming to replenish the major dams in Zambia.
Electricity tariffs were also increased from around $0.05/KWh to $0.09/KWh as of January 2017. The tariff will be reviewed on finalization of a ‘Cost of Service Study’ which was commissioned by the Energy Regulation Board and will be made available in 2018. The new tariffs should help pay for major power projects currently underway as well as increase private sector investment into the energy sector. A potential deal to watch out for in this sector is the possible acquisition of Copperbelt Energy Corp. PLC by Zambian Transmission LLP for approximately $380m.
30% of Bulk and Heavy Cargo to be Moved on Railways
A new Statutory Instrument (SI), to compel 30% of bulk and heavy cargo to be transported by rail has been signed into law. The SI makes sense in theory but in practice, the mining sector is concerned with the following:
The Government certainly does not have the CAPEX funds to invest in railway as significantly as they have invested in the road network over the last 5 years because they have reached a 'ceiling' in Eurobond debt outstanding vs GDP and need to focus a lot more energy on maximizing tax collections in order to plug fiscal gaps. This is the latest tiff between the Government and Mining sector to keep an eye on.
ZCCM-IH Legal Battles
ZCCM Investment Holdings (a Government investment vehicle) has an 20.6% stake in Vedanta (KCM) and 20% in First Quantum Minerals (FQM) Zambia operations. It has recently won a hefty judgement against KCM of $136 million and suing FQM for $1.4 billion (currently in courts of law). The FQM case would be a significant judgement if successful -- definitely one to keep an eye on this year.
The Kwacha experienced siginificant depreciation against the US dollar between 2015 and 2016. It has since settled to around K9 - K10/USD which is a long way off the K5 - K6/USD levels:
The South African Rand has also strengthened significantly vs the Kwacha over the last couple of years.
Trying to decipher this puzzle that is Zambia by using a variety of publicly available data (structured and unstructured) in conjunction with my own skill/experience. * * *